Economics: Monopoly & Monopolistic Competition

Economics flashcards on Monopoly and Monopolistic Competition.

Monopoly

A market structure with a single seller and no close substitutes.

Monopoly Arising

Occurs through natural causes (e.g. economies of scale) or government protection (e.g. patents and copyrights).

Monopolist's Pricing Power

Monopolists are price-makers; they set the price by choosing quantity where MR = MC.

Monopolist's Output and Price Determination

A monopolist maximizes profit where marginal revenue equals marginal cost (MR = MC), then sets price from the demand curve.

Monopoly vs. Perfect Competition: Output and Price

Monopolies produce a lower quantity and charge a higher price, resulting in deadweight loss.

Deadweight Loss (Monopoly)

Lost economic efficiency when a monopolist produces less than the socially optimal quantity.

Improving Efficiency in a Monopoly

Through first-degree price discrimination or government regulation.

Legal Market Power

Power granted through patents or copyrights by the government.

Natural Market Power

Power that results from firm-controlled barriers to entry like control of resources or economies of scale.

Examples of Natural Market Power

Alcoa's control of bauxite, De Beers' control of diamonds, or exclusive sports talent rights.

Barriers to Entry (Natural Monopolies)

High fixed costs make it unprofitable for new firms to enter.

Price Effect (Monopoly Pricing)

Lowering price increases quantity sold but reduces revenue per unit.

Quantity Effect (Monopoly Pricing)

Selling more units increases total revenue.

Monopolistic Competition

Market structure featuring many sellers with differentiated products and free entry/exit.

Profit-Maximizing Quantity (Monopolistic Competition)

Producing where marginal revenue (MR) equals marginal cost (MC).

Price vs. Marginal Cost (Monopolistic Competition)

Price is greater than marginal cost because the firm has market power due to product differentiation, so the demand curve is downward sloping.

Long-Run Economic Profits (Monopolistic Competition)

New firms enter, reducing demand for existing firms until profits are zero.

Long-Run Losses (Monopolistic Competition)

Some firms exit, increasing demand for the remaining firms until losses are eliminated.

Economic Profit (Monopolistic Competition)

A firm's price is above its average total cost (ATC).

Economic Loss (Monopolistic Competition)

A firm's price is below its average total cost (ATC).

Long-Run Economic Profit (Monopolistic Competition)

No, due to free entry and exit, long-run profit is driven to zero.

Efficiency (Monopolistic vs. Perfect Competition)

Less efficient because P > MC and firms do not produce at minimum ATC.

Distinguishing Characteristics (Monopolistic Competition)

Has many firms like perfect competition but differentiated products like monopoly.